US lawmakers scrutinise World Bank record on corruption

28 May 2004

In mid-May the US Senate Foreign Relations Committee opened a hearing on corruption in multilateral development banks. Senator Richard Lugar, an Indiana Republican who chairs the Committee, cited experts who estimate that $26 – 130 billion of World Bank lending since 1946 has been misused. The World Bank rejected this figure and mounted a vigorous defence of its anti-corruption efforts.

The Committee has expressed particular interest in the Lesotho Highlands Water Project and the Yacyreta Dam on the Argentina-Paraguay border. Lugar commented “the Yacyreta Dam project was budgeted to cost $2 billion when it began in 1973, now has a debt of $10 billion — and is still not completed”. Senator Lugar commented that “when developing countries lose development bank funds through corruption, the taxpayers in those poor countries are still obligated to repay the development banks. So, not only are the impoverished cheated out of development benefits, they are left to repay the resulting debts to the banks”.

Bank President Wolfensohn declined to give evidence before the committee, citing the established practice of Bank officials not testifying before the legislatures of their member countries. But the Bank produced a briefing setting out a series of steps taken in the last eight years. The Bank recently introduced a rule that all of its senior managers must provide an annual statement listing their financial interests and those of their immediate family.

the MDBs know that they will be paid-back regardless

The Bank has fifty staff who have examined more than 2,100 cases of fraud and corruption since 1999. Issues examined include theft, bid-rigging, bribes, collusion or coercion by bidders, fraud and product substitutions. More than 180 companies and individuals have been debarred from doing business with the Bank, either temporarily or indefinitely. These companies are, however, almost all small firms. Larger companies have somehow escaped censure. On the Lesotho Highlands Water project Senator Lugar questioned the fact that although three international companies have been convicted of bribery, none have been placed on the World Bank’s list of reprimanded or disbarred firms and may thus continue tendering for work on Bank projects.

The Bank advises developing country governments on anti-corruption statutes and says it is assisting 40 countries with enforcement. It also points to its work to try to ensure that the Chadian government would only spend that country’s new oil revenues on poverty-reducing projects. In testimony to the Committee, Carole Brookins, US Executive Director to the Bank, summarised that “the Bank has built a comprehensive structure that includes international advocacy, internal controls, analytical/diagnostic tools, education and training, and country operations”.

Nancy Zucker Boswell, Managing Director of Transparency International USA also testified. She agreed that the Bank “has made great strides” but that the Bank’s work on governance “has not been adequately specific”. She said the Bank should condition lending on reforms including access to information legislation, asset disclosure by public officials, budget and procurement transparency and transparency of campaign finance and voting records. She pointed out that such objectives have already been agreed by many governments when signing the UN Convention on Corruption, agreed last year. She demanded that the Bank publish full details of contracts and sub-contracts paid for by its funds and require all bidders on Bank-financed projects to adopt anti-bribery compliance programs.

In his contribution to the Committee Manish Bapna, Executive Director of the Bank Information Center, also pointed to the “pressure to lend and culture of loan approval” which have inhibited a culture of accountability in the Bank. He emphasized that “corruption can undermine the development impact of these projects in countless ways. Examples include diluting the quality of cement in roads or irrigation canals; permitting illegal timber harvesting in restricted forest areas; and granting profitable public contracts to well-connected cronies of Government officials”. He argued that to be involved multilateral development banks should:

  • ensure that the host country meets a minimum standard of governance;
  • carry out due diligence to identify and mitigate corruption risks; and
  • help create an open environment conducive for civil society and media to monitor the project throughout implementation.

Bapna pointed out the dangers with privatisation deals, where “high-level government officials use borrowed funds to renovate public service enterprises and sell or concession them to ‘associates’ at prices well below their actual market values.” He argued that the Bank should force companies that want to receive its support to adopt much broader corporate transparency and disclosure requirements.

He welcomed recent steps taken by Congress to require reports on the extent to which each MDB has resources to ensure that applicable laws are obeyed. He commented, however, that “immune from lawsuits and legal challenges, the MDBs know that they will be paid-back regardless of how much money is diverted or stolen. This situation provides a weak incentive to properly exercise full fiduciary duty to ensure that the money goes to its proper purposes.” He pointed out that the UN Convention Against Corruption recommends waiving immunity of international institutions in cases of corruption and that Congress might want to review the International Organizations Immunities Act to take account of this.

Dr Jeff Winters of North-Western University estimated that up to $100 billion of World Bank funds might have been diverted in the last sixty years, a figure the World Bank dismissed as “incomphrensible”. Winters proposed establishing “an international auditing body that is independent of the MDBs and of private sector auditing firms — nearly all of which have deep conflicts of interest.”